“I started NetSuite. NetSuite was my idea,” famously stated Oracle’s founder and then-CEO Larry Ellison during a public appearance in 2012. Ellison was talking about one of the originators of SaaS service, for which he indeed was the initial backer, reportedly holding more than 40 percent of that company’s stock as recently as yesterday.

When the always outspoken, but never predictable, Ellison, now his company’s Chairman and CTO, boasted during his company’s earnings call last March without any prompting from colleagues or analysts that, hey, Oracle Fusion ERP has 10 times the number of customers — no, make that more than 10 times the customers — of rival ERP producer Workday, any analyst with so much as a single ear knew something was up.

“And ERP has always been a much larger market than CRM,” explained Ellison, perhaps arguing against someone else in the room at the time whom we didn’t hear. “Salesforce.com is missing all of that ERP market opportunity. The breadth of our ERP HCM and CRM SaaS product portfolio, combined with the technical superiority of our underlying SaaS cloud services, should enable us to sustain our rapid cloud growth for a long period of time. And that, in turn, should make it easy for Oracle to pass Salesforce.com and become the largest SaaS and PaaS cloud company in the world.” [Our thanks to Seeking Alpha for the transcript.]

ERP: Legacy or Trailblazer?

Enterprise Resource Planning (ERP) is not the typical subject of a Datacenter Knowledge profile. But the market segment is important in our context, because it helped launch the SaaS market, first by providing the tension it needed to create a clear market demand, and then by developing a service that only stronger data centers could fulfill.

The tension part came courtesy of legacy software. The first ERP products were developed for specific job categories — procurement had its own planning tools, as well as sales, and marketing was also separate. Eventually, the U.S. Bureau of Labor Statistics sought to simplify matters by formally declaring eight categories of ERP, in a desperate effort to whittle the number down to just eight. Even when SAP, the ERP leader at the time, tried to appease the U.S. Government — one of its largest customers — it managed to sneak more categories into its proofs of concept, until finally it was getting away with 15.

NetSuite’s initial appeal was not so much that it was cloud-based, but that its ERP was not modularized. Its main goal has always been to facilitate a single planning tier. However, leading customers to that goal has been such a slow process that it has become an industry in itself. In October 2012, as part of a strategic agreement between the two companies, NetSuite announced the production of a two-tier ERP platform for Oracle. A “two-tier” platform enables an organization to maintain its legacy system — in this case, Oracle Fusion ERP (although Ellison would beg to differ about the characterization) — while working to integrate new processes into the organization through NetSuite.

Integration is the Key

Integration is undoubtedly one of the leading drivers for enterprise cloud adoption today, not so much as a way to move away from old platforms as to effectively “embrace and extend” them. It’s part of what makes NetSuite such an attractive acquisition target for Oracle.

“I see ERP moving to SaaS very, very quickly,” said Paul Hamerman, Forrester’s vice president and principal analyst, in a conversation with Datacenter Knowledge Thursday. “I’ve been studying some of the adoption data in this market for some time, and it’s pretty recently reaching an inflection point where SaaS is becoming a preferred delivery model for ERP — not necessarily among the largest companies, but certainly in the mid-market.”

When Ellison’s March comment tripped off rumors of Oracle’s pending NetSuite acquisition, financial analysts warned against the move, saying that the future value of NetSuite’s customer strategy in the ERP market was uncertain. But Hamerman — a technology analyst, not a financial one — strongly disagrees, citing NetSuite’s two-tier integration strategy that began back in 2012.

Because Ellison has always been NetSuite’s largest shareholder, Hamerman believes, it maintained a kind of policy that intentionally restrained it from aggressively going after Oracle’s customers. This let both Oracle and NetSuite target SAP, arguably the pioneers in that category.

Nevertheless, Hamerman’s data tells him, NetSuite ended up acquiring Oracle’s customers anyway, as the journeys begun by the two-tier strategy started coming to a close. Even though many analysts and observers have noted a general market trend away from all-public cloud deployments and toward hybrid, with respect to ERP, organizations were moving toward NetSuite and its public SaaS.

“The company’s been growing at thirty-plus percent for several years now,” the Forrester analyst told us, “and it was inevitable that the two [Oracle and NetSuite] would be competing with one another more explicitly in those deals.

“So one of the things Oracle will gain in this acquisition is, it won’t have to compete with NetSuite any more. And they can integrate them into an overall strategy where they can position their cloud ERP solution into certain segments of the market, positioning Oracle more in the mid-market.”

What should have been more obvious to everyone, but it took Forrester’s Hamerman to point out, is that NetSuite was already being supported and hosted by Oracle infrastructure. So Oracle does not need to reinvent the wheel in order to integrate NetSuite into its operations. NetSuite can continue doing business as it has been, including offering its ERP cloud services as an integration platform.

“Oracle’s cloud business is growing very, very quickly,” the analyst pointed out, “but its traditionally on-premise ERP products — including PeopleSoft, E-Business Suite, and JDEdwards — are declining. So it’s an important acquisition for Oracle, in order to push their revenues more towards the subscription side, and really outrun the decline on the traditional revenue side of licenses and maintenance.”

Right now, Oracle could do well with an acquisition capable of running under its own power. When an acquisition requires guidance and direction from Oracle — as certainly has been the case with Sun Microsystems’ assets, especially Java — when the acquired asset begins languishing, its supporters are quite capable of starting a revolt.

Regardless of the outcome, however, we can perhaps expect Larry Ellison to say, I told you so.